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This publication is available at https://www.gov.uk/government/publications/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation-technical-note/off-payroll-working-in-the-public-sector-reform-of-the-intermediaries-legislation-technical-note

Background

1.At Autumn Statement 2016 the government confirmed that it will reform the intermediaries legislation in Chapter 8 Part 2 Income Taxes (Earnings and Pensions) Act 2003 (ITEPA 2003) often known as IR35. The government has published the Finance Bill 2017 to introduce a new Chapter 10 Part 2 ITEPA 2003.

2.Subject to Parliamentary approval and Royal Assent the measure will introduce Off-payroll working in the public sector legislation applying to payments made on or after 6 April 2017. The measure applies to contracts entered into before that date. If work is completed before 6 April 2017 but payment made on or after 6 April 2017 it will be within the new legislation.

Treasury procurement rules for public appointees

3.Off-payroll working in the public sector tax legislation is separate from Treasury procurement rules which apply in central government. The Treasury rules broadly apply where staff are hired at a rate of £220 per day or on contracts of more than 6 months. These thresholds do not apply to the tax rules.

agencies and third parties who supply workers to the public sector (particularly where the workers are employed through their own company)

workers who provide their services to a public body through an intermediary (usually their own company)

Overview

5.The intermediaries legislation ensures that individuals who work through their own company pay employment taxes in a similar way to employees, where they would be employed were it not for the personal service companies (PSC) or other intermediary that they work through. Please read IR35 (intermediaries legislation): find out if it applies.

6.This new measure, “Off-payroll working in the public sector” moves responsibility for deciding if the off-payroll rules for engagements in the public sector apply from an individual worker’s intermediary to the public authority, agency, or third party paying the intermediary. The measure makes that public authority, agency, or third party responsible for deducting and paying associated employment taxes and National Insurance contributions (NICs) to HM Revenue and Customs (HMRC).

7.This change does not affect:

workers who provide their services to clients other than public authorities

where an agency directly employs a worker and it operates tax and NICs on earnings it pays to the worker;

foreign entertainers who are within the statutory tax withholding scheme

8.Where a public authority, agency, or third party, “the fee payer” makes a payment to a worker’s intermediary on or after 6 April 2017, it decides if the rules apply, and then deducts tax and primary NICs from the payment it makes, and pays employer NICs and is included for calculating the Apprenticeship Levy. The VAT exclusive amounts must be accounted for through Real Time Information (RTI), in in the same way as for an employee. The change does not affect employment rights available to the worker.

9.The worker’s intermediary is able to reduce the turnover it records to reflect the deductions made from the fee from the fee payer.

10.A 5% deduction currently allowed to intermediaries for “notional expenses” will no longer be available in the public sector.

11.This measure applies to payments on or after 6 April 2017 and so will affect contracts entered into before 6 April 2017 and operating after that date. Public authorities and agencies and third parties supplying workers to the public authorities need to consider existing contracts and prepare for the change.

12.Off-payroll working in the public sector does not create any new pension obligations on the public sector, agency, or third party to operate occupational or Stakeholder Pensions. The worker continues to be able to keep up any pension they have with their intermediary and to continue to claim tax relief there.

Summary of the current intermediaries rules

13.Current law is included in Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) Part 2 Chapter 8, sections 48 to 61, and the Social Security Contributions (Intermediaries) Regulations 2000 (SI 2000 No 727).

14.In Chapter 8 Part 2, the obligation to operate Chapter 8 and to pay tax and NICs falls on the worker’s intermediary, usually their own company. Under the proposed new Chapter 10 Part 2 rules, public bodies, agencies and third parties supplying workers to the public bodies will now have to decide if the rules apply and tax and NICs liability in respect of the payments they make to the worker’s intermediary.

15.The ‘intermediaries legislation’ is a set of rules that affect your tax and NICs if you’re contracted to work for a client through an intermediary. The intermediary can be:

your own limited company

a service or personal service company

a partnership

an individual

16.The main features of this legislation:

if the intermediaries legislation applies then the intermediary has to operate tax and NICs on any salary or wages it pays during the tax year. Additionally, the intermediary may have to pay tax and NICs on a “deemed employment payment” at the year-end

you need to apply the intermediaries legislation if you work for a client as a contractor, sole trader, freelancer, or consultant

you could be considered an employee if the intermediary didn’t exist;

you pay yourself through your own limited company or partnership (sometimes called an ‘intermediary’ or ‘personal service company’) and you have a material interest in that company

17.The intermediary must look at the arrangements under which the worker provides their services to the client and if that contract had been direct between the worker and client, decide if the worker should be an employee or self-employed, applying the normal employment status tests. If applying the employment status tests to the engagement the worker would have been an employee of the client but for the existence of the intermediary, then tax and NICs on the deemed employment payment is required.

18.Please read advice about the employment status tests. Work as an office holder of the client is always caught within the intermediaries rules. Before the measure comes into force HMRC will also provide an online guidance service.

19.Where the intermediaries legislation in Chapter 8 Part 2 applies, the extra tax and NICs on the deemed employment payment is similar to the amount of employment taxes that would have been paid if the employee had been employed directly. To find out more please read IR35: what to do if it applies.

20.In the private sector these rules in Chapter 8 will continue to apply.

The New Rules

21.The measure in Chapter 10 will apply where workers provide their services to a public authority through an intermediary.

22.The intermediary must be one within the scope of the measure.

23.The employment status tests apply to the arrangements, the engagement has to be one of employment (but for the existence of the intermediary).

Public Authority

24.Off-payroll working in the public sector introduces a new Chapter 10 ITEPA 2003 setting out the rules that apply where a worker provides their services to a public authority through an intermediary. Where the new rules in Chapter 10 apply, the intermediaries rules at Chapter 8 do not apply. There will be matching NICs legislation.

25.The new rules apply where the services of a worker are provided through an intermediary to a “public authority”. A public authority means a public authority for the purposes of:

the Freedom of Information Act 2000

the Freedom of Information (Scotland) Act 2002

the UK Parliament

National Assembly for Wales Commission

Northern Ireland Assembly Commission

26.This definition covers government departments and their executive agencies, many companies owned or controlled by the public sector, universities, local authorities, parish councils and the National Health Service. The Acts cover England, Scotland Wales and Northern Ireland. Some cross-border public bodies in Northern Ireland are outside the Freedom of Information Act 2000.

27.Where the new rules apply to an engagement, and the public authority contracts with the intermediary, the public authority is liable to operate tax and NICs.

Accounting for Tax, NICs and the Apprenticeship Levy when payments are made to the worker’s company

28.Where the rules apply, the person paying the fee to the intermediary for the worker’s services “the fee payer”, is treated as an employer for tax, NICs and Employment allowance purposes.

29.Where the public authority client contracts with the intermediary, the public authority is treated as if it were the employer for tax and NICs purposes.

Engagements to which the new rules apply

30.The new provisions apply when:

a worker personally performs services, or is under obligation to personally perform services for the client

the client is a public authority

the services are provided under circumstances where, if the contract had been directly with the client, the worker would be regarded for Income Tax purposes as an employee of the client or the holder of an office with the client, or the worker actually is an office holder with the client

31.The off-payroll working in the public sector legislation in Chapter 10 imposes the same employment status test. The person paying the intermediary must look at the arrangements under which the worker provides their services to the client. If applying the employment status tests to that engagement shows they would have been an employee of the client but for the existence of the intermediary, then the engagement is caught by the new rules. This is the same kind of employment status test based on case law that public bodies and agencies have to consider when they hire staff directly. Please read Employment status.

Requirement on public sector body to provide information to agency as to whether employment status test is met

33.The public sector client must inform the intermediary, agency, or third party with whom they have a contract to provide the services that the contract falls within the new off-payroll rules or that it does not. For contracts starting on or after 6 April 2017, this decision should be notified before the date of entry into the contract, or before the provision of the services begins. For contracts already in place before 6 April 2017, the decision should be notified before the date of the first payment made on or after 6 April 2017. This conclusion can be included in the contract with the intermediary, agency, or other third party, or separately. If the public sector client fails to notify its decision within the timescale, they become liable to account for tax and NIC.

34.The intermediary, agency or other third party with whom the public sector client has contracted directly may request a written response setting out the reasons for the decision.

35.The public sector client must reply to the written request for the reasons within 31 days of receiving it. If the public sector client does not reply to the request within 31 days they become responsible for accounting for tax and NICs.

36.Public authorities must ensure there is clear process in place to comply with this information requirement and exercise reasonable care in providing their view. An authority that fails to exercise reasonable care can be held liable.

Worker treated as receiving a deemed direct payment

37.The worker is treated as receiving a deemed direct payment when they are paid for the services they provide and the statutory conditions are met. Where the new rules apply, the fee payer must operate tax and NICs. The fee paid to the intermediary is treated as a payment of the worker’s employment income when it is paid. For tax, NICs and Apprenticeship Levy purposes, the worker is treated as having an employment with the fee payer. Stakeholder pensions, statutory payments and certain other employment rights do not apply.

The amount treated as worker’s earnings

38.The amount treated as earnings is the VAT exclusive amount paid to the worker’s intermediary.

How to calculate the deemed direct payment on which tax, NICs and Apprenticeship Levy are paid.

39.The steps to calculate the deemed direct payment are set out below:

Step 1 - the amount of the payment less the amount (if any) of VAT

Step 2 - deduct so much of that amount as represents the direct cost of materials used, or to be used up in performance of the services and incurred directly by the intermediary.

Step 3 - This step is optional only. Deduct an amount as represents expenses met by the intermediary that would have been deductible if the worker had been the client’s employee and the expenses had been met by the worker out of those earnings

Step 4 - If the amount is nil or a negative amount there is no deemed payment. Otherwise that is the amount of the deemed earnings payment.

40.Note that there is no 5% deduction

Fee payer accounts for tax, NICs, Apprenticeship Levy

41.The changes require the fee payer to operate the rules for tax, NICs, and the Apprenticeship Levy in the same way as for a normal employee. The worker is legally required to furnish NINO, tax code and identity details to enable the right tax to be deducted and then recorded by HMRC and their NICs to be recorded on their account for benefit purposes.

42.On or before the fee payer makes payment to the intermediary, the fee payer has to complete the normal RTI process and notify HMRC of the amount of the taxable earnings and the tax and NICs deducted through the RTI process. Please read PAYE Online for employers.

43.This measure contains a provision against double taxation:

the legislation has an impact on the tax liabilities of the worker’s intermediary. Broadly speaking, the intermediary is able to set the amount of the deemed payment on which tax and NICs has been paid against the amount of remuneration from the intermediary on which tax liabilities arise

the corporation tax computation is also adjusted so that the intermediary cannot claim a double deduction for the costs associated with the engagement

the worker’s intermediary continues to be able to deduct certain pension related expenses and capital allowances under section 262 of Capital Allowances Act 2001

the worker’s intermediary is no longer permitted to deduct a 5% allowance in relation to engagements in the public sector

Special situations

44.There are anti-avoidance provisions to deal with situations where the agency or third party that would be the liable fee payer is offshore. In such a situation the liability moves to the next person in the contractual chain who is in the UK. If only the public authority is in the UK, then the client is liable. So, public sector bodies, agencies and third parties need to understand the consequences if they are contracting with non-UK entities.

45.Where an intermediary is outside the UK but the worker performs services in the UK, fee payers must still deduct tax.

Visiting Performers

46.The off payroll rules do not apply where the rules at section 966(3) or (4) of the Income Taxes Act 2007 requires deduction from visiting entertainers apply.

Construction Industry Scheme (CIS)

47.The off-payroll rules take precedent over the CIS. Where the new Chapter 10 applies, the CIS does not.

Managed Service Companies

48.Where the conditions in Chapter 10 Part 2 are met, this new legislation takes precedent over the Managed Service Company rules in Chapter 9 Part 2. Please read Employment Status Manual. This is an anti-avoidance provision introduced to counter marketed schemes.

Agency employs the worker directly not via intermediary and deducts tax and NICs

49.Where an agency contracts directly with the worker as an employee and operates tax and NICs, or engages them on a self-employed basis but operate tax and NICs under agency rules, then the off-payroll rules do not apply.

Umbrella Company

50.Where an umbrella company employs the worker directly as an employee and does not contract using an intermediary, the new off-payroll rules do not apply. Some umbrella companies do not employ the worker directly and use intermediaries - so this should be checked. If this is not the case then the normal rules apply.

Statutory Payments and other obligations

51.The new legislation will impose tax and NICs obligations, the Apprenticeship Levy applies to a person who must pay employer NICs and will therefore apply. Eligibility for Employment Allowance is also triggered by the payment of employer NICs. However, statutory payments and other employment rights are unaffected by the new legislation. The following information explains how these rights are dealt with.

Statutory Sick Pay - no rights through the end-client or fee-payer. Worker has rights through the PSC as employer.

Statutory Maternity Pay - PSC, but reclaimable from Exchequer.

Statutory Paternity Pay - PSC, but reclaimable from Exchequer.

Statutory Adoption Pay - PSC, but reclaimable from Exchequer.

Statutory redundancy pay - no rights through the end-client or fee-payer. Worker has rights through the PSC as employer.

National Minimum Wage - no rights through the end-client or fee-payer. Worker has rights through the PSC as employer.

Pensions auto-enrolment - no rights through the end-client or fee-payer. Worker has rights through the PSC as employer.

Pension contributions tax and NICs relief:

public sector, post-reform, same as before, relief through own company

pre-reform and private sector, full IT and NICs relief from Exchequer on PSC contributions.

Paid annual leave - no rights through the end-client or fee-payer. Worker has rights through the PSC as employer.

Protection from unlawful deduction from wages - no rights through the end-client or fee-payer. Worker has rights through the PSC as employer.

Examples

Rebecca is an Information Technology (IT) Contractor engaged by a central government department, the Ministry - off-payroll working rules apply.

Context

Rebecca works through her own PSC, Rebecca IT Ltd and is interested in a six month engagement as an IT product designer at the Ministry where she has worked in the past.

Rebecca IT Ltd has a draft contract from the Ministry to provide Rebecca’s services. Rebecca is keen to understand the role, the objectives and expectations of the post. She also wants to know how the job will affect her tax and NICs, and those of her PSC.

Do off-payroll rules apply?

The Ministry’s Human Resources (HR) department has experience of confirming the employment status of all of their off-payroll workers following the issue of Procurement Policy Note 08/15 - Tax Arrangements of Public Appointees, on 27 March 2015.

The Ministry has advised that they consider the post to be subject to the changes to the off-payroll working rules. Rebecca has read about these changes so she asks her accountant to find out how they will affect her. He uses the off-payroll service available on GOV.UK to understand the implications.

From the draft contract, the accountant notes that:

Rebecca will be working in at the Ministry’s IT development centre

she is not required to supply her own equipment

Rebecca will work under the direction of a senior manager

flexible working hours are available but Rebecca will need to agree time off with her manager

Using the Employment Status Service

Rebecca’s accountant uses the online Employment Status Service to help him understand the situation. Rebecca owns more than 5% of her PSC and is the sole director and employee.

The Employment Status Service asks for responses to a variety of questions to determine whether off-payroll working rules should apply. For Rebecca, the service indicates that the rules should be applied.

The contract will be subject to the new rules for working off-payroll in the public sector. Rebecca is happy that her own, and her PSC’s tax affairs will be compliant with the rules. Rebecca IT Ltd accepts the contract and Rebecca starts work.

Deducting tax and NICs

She provides the HR manager at the Ministry with the information they need to provide to HMRC, via RTI of the tax and NIC deducted from the payments made to Rebecca IT Ltd, as if Rebecca was an employee.

This includes:

Rebecca’s National Insurance Number

her date of birth and personal address

a P45 from Rebecca’s previous employments in the tax year if available

the bank account details in to which payments will be made

Rebecca does not need to provide any Student Loan information as she declares that through her self-assessment tax return.

Paying the PSC

As the fee-payer, the Ministry’s Finance and Payroll departments update their systems to enable tax and NICs to be deducted from payments to the PSC, Rebecca IT Ltd. Rebecca will not be enrolled in to the Ministry’s pension scheme, or pay-rolled benefits arrangements.

More detailed guidance regarding tax codes and the information that fee-payers need to supply in Full Payment Submissions (FPS) will be issued shortly, after we publish draft legislation.

Responsibility for secondary NICs

The Ministry will pay secondary NICs related to the engagement, as it does for directly employed people.

Payments and deductions made by the Ministry (all figures are illustrative)

Each month, Rebecca IT Ltd invoices the Ministry £7200 which includes £1200 VAT.

The Ministry treats £6000 as Rebecca’s earnings and deducts £1400 tax and £400 employee NICs which it pays to HMRC via RTI with £700 employer NICs.

Each month, the Ministry pays Rebecca IT Ltd a total of £5400, which is £4200 for the services provided plus £1200 VAT.

Statutory payments

As Rebecca will not be an employee of the Ministry she will not be able to claim statutory payments, such as Statutory Sick Pay and Statutory Maternity Pay through their payroll.

As is the case now, Rebecca will continue to be able to claim statutory payments through her PSC.

Payments received by Rebecca IT Ltd

Rebecca draws £3000 in salary each month through Rebecca IT Ltd’s payroll. Tax and NICs are not deducted as these have already been deducted at source by the Ministry. This means that Rebecca will continue to be able to claim statutory payments, as she can now.

From the contract with the Ministry, Rebecca IT Ltd receives:

£25200 in payment from the Ministry, net of tax and NICs

£7200 VAT charged for services provided

The contract ends

When the contract comes to an end, the Ministry gives Rebecca a P45 as they would for a directly employed person who leaves their employment. The P45 indicates Rebecca has paid £8400 tax and £2400 NICs.

Rebecca moves on to other contracts in the private sector for which she receives £20000 for five months’ work. Rebecca IT Ltd determines that the intermediaries legislation should be applied and pays Rebecca a salary of £3000 and deducts tax and NICs and pays them to HMRC, with employer NICs.

At the end of the year

At the end of the financial year, because Rebecca has paid Income Tax on income going into the PSC, her accountant disregards this engagement when calculating the deemed employment payment due for Rebecca IT Ltd. This ensures Rebecca will not pay tax and NICs twice on the same income.

Rebecca’s accountant includes the income from the engagement with the Ministry, with the other deemed employment payments received in the employment income section in her self-assessment tax return.

The VAT and corporation tax liabilities of Rebecca’s PSC remain unchanged by the proposed reforms.

Context

An employment agency, Workers 4 U Ltd specialises in supplying medical staff to the NHS. An NHS Trust has contracted the agency to supply them a mental health nurse for a year to cover a period of maternity leave. The contact is worth £36000 plus VAT.

Mikael is a mental health nurse who provides his services through a PSC, Mikael Health Ltd. He gets much of his work through Workers 4 U Ltd.

Do the off-payroll rules apply?

The NHS Trust’s HR department has experience of confirming the employment status of off-payroll workers following the issue of Procurement Policy Note – Tax Arrangements of Public Appointees, 08/15 on 27 March 2015. That however does not apply to agency staff.

The agency knows there have been changes to off-payroll working in the public sector. As they will be paying Mikael’s PSC, Workers 4 U Ltd asks the NHS Trust to determine whether off-payroll rules need to be applied.

The NHS Trust have advised the agency that the worker they supply will be expected to:

be part of a team working to a Head Nurse

work a fixed shift pattern in one of their local units

the shift pattern and location could change at short notice where necessary

all equipment required to undertake the role will be provided

parking is also provided at no cost to the worker

Using the Employment Status Service

The NHS Trust uses the online Employment Status Service which determines that the engagement would be subject to the new rules for working off-payroll in the public sector if a worker was provided though a PSC. It advises Workers 4 U Ltd accordingly.

Deducting tax and NICs

Mikael agrees to take the job. The agency tells Mikael that the invoice his PSC sends them will be paid net of tax and employees’ NICs. Workers 4 U Ltd’s finance department obtain from Mikael the information needed to pay his PSC having deducted and paid over to HMRC the tax and NICs due each month.

This includes:

his National Insurance number

date of birth

personal address

P45 from previous employments if available

the bank account details in to which payments will be made

Workers 4 U Ltd will not need any Student Loan information from Mikael as he declares that through his self-assessment tax return.

Paying the PSC

As the fee-payer, Workers 4 U Ltd’s accounts department update their systems to enable tax and NICs to be deducted from payments to Mikael Health Ltd. When doing so, the payroll team marks the record to indicate that the employment will not be subject to pension enrolment or pay-rolled benefits arrangements.

More detailed guidance regarding tax codes and the information that fee-payers need to supply in FPS will be issued shortly, after we publish draft legislation.

Responsibility for secondary NICs

The agency will pay secondary NICs related to the engagement, as it does for directly employed people.

Statutory Payments from Workers 4 U Ltd

As Mikael will not be an employee of Workers 4 U Ltd he will not be able to claim statutory payments, such as Statutory Sick Pay and Statutory Paternity Pay through their payroll. As is the case now, Mikael will continue to be able to claim statutory payments through his PSC.

Payments and deductions made by Workers 4 U Ltd (all figures are illustrative)

Each month, the agency invoices the NHS Trust a figure of £3600 for the cost of the labour provided. This includes £600 VAT.

Mikael, through his PSC sends the agency an invoice for £2200 per month as the agreed charge for his services. Mikael Health Ltd is not registered for VAT as the company’s turnover is below the VAT minimum threshold.

The agency treats the full amount of the invoice, £2200 as Mikael’s earnings and deducts £250 tax and £200 employee NICs which it pays to HMRC via RTI with £200 employer NICs.

The agency pays Mikael Health Ltd a total of £1750.

End of contract

From the £36000 invoiced to the NHS Trust, the agency pays out:

£21000 in payments to the PSC

£3000 Income Tax, £2400 employee and £2400 employer NICs to HMRC

Workers 4 U Ltd earns £7200 from this engagement before its own costs are taken into account.
They give Mikael a P45 as they would for a directly employed person who leaves their employment.

Midshire CC, a local council engages an HR Executive through his Personal Service Company – off-payroll working rules apply

Context

Midshire County Council has decided to overhaul its HR system and wants to hire someone to lead that. Tim is a qualified HR professional who provides his services through his company, Tim HR Ltd. He responds to Midshire CC’s job advert on an HR trade website.

The council has offered Tim HR Ltd a six-month contract worth £60,000, plus VAT to lead the delivery the new HR system. The contract is for a fixed monthly payment of £10000, plus £2000 VAT to be made to Tim HR Ltd.

Do off-payroll rules apply?

The council wants to ensure it operates the new off-payroll working rules properly. It uses the online Employment Status Service to determine if Tim should be subject to them or not. Tim has confirmed that he owns more than 5% of his PSC and is the sole director and employee.

In the job, Tim will be:

in charge of leading a small team

expected to work in the council’s main offices

managed by the council’s Head of Personnel

provided with the equipment needed to do his job

The Employment Status Service indicates that the off-payroll working rules should be applied.

Deducting tax and NICs

Midshire CC’s HR department obtains from Tim the information needed to pay his PSC through their payroll systems. This includes:

Tim’s National Insurance number

his date of birth and personal address

a P45 from previous employments if available

the bank account details in to which payments will be made

They do not need any Student Loan information from Tim as he declares that through his self-assessment tax return.

Paying the PSC

As the fee-payer, the council’s HR department advises their accounts department that payments for Tim’s services will need to be made net of tax and NICs. They update their systems to enable tax and NICs to be deducted from payments to the PSC, Tim HR Ltd.

When doing so, the payroll team indicates that the engagement will not be subject to pension enrolment or pay-rolled benefits arrangements.

More detailed guidance regarding tax codes and the information that fee-payers need to supply in FPS will be issued shortly, after we publish draft legislation.

Responsibility for secondary NI contributions

Midshire CC will pay secondary NICs related to the engagement, as it does for directly employed people.

Payments and deductions made by Midshire CC (all figures are illustrative)

Each month, Tim’s PSC invoices the council £12000 which includes £2000 VAT.

The council treats £10000 as the cost of Tim’s services and deducts £3000 tax and £480 employee NICs which it pays to HMRC via RTI with £1250 employer NICs.

The council pays Tim HR Ltd £8520 each month which includes £2000 VAT.

In total the six-month contract with Tim HR Ltd will mean that Midshire CC pays:

£39120 in payment to the PSC (excl. VAT)

£18000 Income Tax, £2880 employee and £7500 employer NICs

£12000 VAT

Statutory payments

As Tim will not be an employee of Midshire CC he will not be able to claim statutory payments, such as Statutory Sick Pay and Statutory Paternity Pay through their payroll. As is the case now, Tim will continue to be able to claim statutory payments through his PSC.

End of contract

At the end of the contract with Tim HR Ltd, Midshire CC give Tim a P45 as they would for a directly employed person who leaves their employment.

Stockwell University College (UC) engages Anna to lead their Communications portfolio – off-payroll working rules apply

Context

Stockwell UC is a small university who are looking to expand and build their communications portfolio. They advertise in the trade press for someone to take that role.

Anna has worked in communications as a journalist and an online brand manager. She provides her services through her PSC, Anna Communications Ltd. The university want to give her the job and offer a contract to Anna Communications Ltd for her services. The contract is for 12 months at £4000 per month plus VAT.

Do off-payroll rules apply?

The university has not previously been required to understand the employment status of workers that it engages off-payroll through contracts, nor provide assurances that tax and national insurance rules are being correctly applied. The university’s HR department is aware of the changes and wants to ensure it operates the new off-payroll working rules properly. In the post, Anna will be:

lead a small team of journalists and administrative workers

expected to work in the university’s main administrative offices

managed by the Stockwell UC’s Head of Personnel

provided with the equipment needed to do her job

Using the Employment Status Service

Stockwell UC uses the online Employment Status Service to determine if Anna’s role should be subject to them or not. Anna has confirmed that she owns more than 5% of her PSC and is the sole director and employee. The Employment Status Service asks for responses to a variety of questions to determine whether off-payroll working rules should apply. For Anna, to service indicates that the rules should be applied.

Deducting tax and NICs

Stockwell UC’s HR department obtains from Anna the information needed to pay her PSC through their accounting systems. This includes:

Anna’s National Insurance number

her date of birth

personal address

a P45 from previous employments if available

the bank account details in to which payments will be made

They do not need any Student Loan information from Anna as she declares that through her self-assessment tax return.

Paying the PSC

As the fee-payer, the university’s HR department will need to make payments to Anna Communications Ltd net of tax and NICs and report those to HMRC. They update their systems to enable tax and NICs to be deducted from payments to the PSC. When doing so, the HR team indicates that the engagement will not be subject to pension enrolment or pay-rolled benefits arrangements.

More detailed guidance regarding tax codes and the information that fee-payers need to supply in FPS will be issued shortly, after we publish draft legislation.

Responsibility for secondary NICs

Stockwell UC will pay secondary NICs, as it does for directly employed people.

Payments and deductions made by Stockwell UC (all figures are illustrative)

Each month, Anna’s PSC invoices the university £4800 which includes £800 VAT.

Stockwell UC treats £4000 as the cost of Anna’s services and deducts £700 tax and £350 employee NICs which it pays to HMRC via RTI with £750 employer NICs.

In total the 12-month contract with Anna Communications Ltd will mean that Stockwell UC pays:

£35400 in payment to the PSC (excl. VAT)

£8400 Income Tax, £4200 employee and £9000 employer NICs

£9600 VAT

Statutory payments

As Anna will not be an employee of the university she will not be able to claim statutory payments, such as Statutory Sick Pay and Statutory Maternity Pay through their payroll. As is the case now, Anna will continue to be able to claim statutory payments through her PSC.

End of contract

At the end of the contract with Anna Communications Ltd, Stockwell UC gives Anna a P45 as they would for a directly employed person who leaves their employment.

Philip is a residential care nurse working in the NHS. The contract started in November 2016 - off-payroll working rules apply from April 2017

Context

Philip is a nurse who specialises in residential care for the elderly. He provides his services through a PSC, Philip Care Ltd. The PSC has accepted a contract for £30000 from an NHS Trust to supply Philip’s services to a residential care home for twelve months. Philip started work on 1 November 2016.

The NHS Trust knows that, from April 2017 changes are being introduced for people working off-payroll in the public sector. As they are responsible for paying Philip’s PSC, the NHS Trust must determine whether off-payroll rules need to be applied, after 6 April 2017.

Do the off-payroll rules apply?

The NHS Trust’s HR department has experience of confirming the employment status of off-payroll workers following the issue of Procurement Policy Note 08/15 - Tax Arrangements of Public Appointees, on 27 March 2015.

The NHS Trust does not intend for any changes to the nature of Philip’s work at the care home. Philip’s work there shows that he:

is part of a team working to a head nurse

works an agreed fixed shift pattern

is supplied all equipment required to undertake the role will be provided

has parking provided at no cost

Using the Employment Status Service

The Employment Status Service asks for responses to a variety of questions to determine whether off-payroll working rules should apply. For Philip, the service indicates that the rules should be applied.

Deducting tax and NICs

The NHS Trust tells Philip that, because of changes to the rules on working off-payroll in the public sector, the way they pay his PSC will need to change. They will deduct tax and NICs from the amount Philip Care Ltd invoices them each month. This change will take affect from all payments due to his PSC from 6 April 2017 onwards.

The NHS Trust’s accounts department obtain from Philip the information needed to pay his PSC having deducted and paid over to HMRC the tax and NICs due each month.

This includes:

his National Insurance number

date of birth

personal address

P45 from previous employments if available

the bank account details in to which payments will be made

The NHS Trust will not need any Student Loan information from Philip as he declares that through his self-assessment tax return.

Paying the PSC

As the fee-payer, the NHS Trust’s accounts department update their systems to enable tax and NICs to be deducted from payments to Philip Care Ltd. When doing so, the payroll team marks the record to indicate that the employment will not be subject to pension enrolment or pay-rolled benefits arrangements.

More detailed guidance regarding tax codes and the information that fee-payers need to supply in FPS will be issued shortly, after we publish draft legislation.

Responsibility for secondary NICs

The NHS Trust will pay secondary NICs related to the engagement, as it does for directly employed people.

Statutory Payments from Workers 4 U Ltd

As Philip will not be an employee of the NHS Trust he will not be able to claim statutory payments, such as Statutory Sick Pay and Statutory Paternity Pay through their payroll. As is the case now, Philip will continue to be able to claim statutory payments through his PSC.

Payments and deductions made by the NHS Trust (all figures are illustrative)

Philip Care Ltd sends the NHS Trust an invoice for £2500 each month as the agreed charge for his services. Philip Care Ltd is not registered for VAT as the company’s turnover is below the VAT minimum threshold.

For November 2016 to March 2017, the NHS Trust treats the full amount of the invoice, £2500 directly to the PSC.

From April 2017, it must deduct tax and NICs. It treats £2500 as Philip’s earnings and deducts £350 tax and £220 employee NICs which it pays to HMRC via RTI with £300 employer NICs.

Each month, Philip Care Ltd is paid a total of £1930.

End of contract

From the £30000 invoiced to the NHS Trust by Philip Care Ltd, it pays out:

November 2016 to March 2017: £10000 gross

From April to November 2017:

£15440 in payments to the PSC

£2800 income tax, £1760 employee and £2400 employer NICs to HMRC

In additions to the value of the contract, the NHS Trust will pay £2400 employer NICs.

They give Philip a P45 as they would for a directly employed person who leaves their employment.

Context

Simone currently works for the Ministry as a Data Analyst. She has worked there for 18 month so far, on six-month contracts with her PSC, Simone Data Ltd.

The Ministry wants Simone to take on additional responsibility, which will mean some changes to the nature of her job. They are willing to offer a higher rate of pay in return and have drawn up a contract which they intend to offer to Simone Data Ltd.

Do off-payroll rules apply?

The Ministry’s HR department has experience of confirming the employment status of all of their off-payroll workers following the issue of Procurement Policy Note 08/15 - Tax Arrangements of Public Appointees, on 27 March 2015.

They are also aware of the changes to off-payroll working in the public sector. The Ministry needs to understand whether the new contract they are offering to Simone Data Ltd will change the way tax and national insurance contributions are deducted and paid to HMRC.

The new contract will give Simone a more senior position and will mean she is expected to:

lead a large team of analysts to support the Ministry’s research functions

expected to work in the Ministry’s main office

managed by the Ministry’s Director General of Digital and Data Analysis

provided with the equipment needed to do her job

These conditions are all new to the contract they are offering Simone Data Ltd. Previously, Simone had been able to work from home, use her own laptop and did not manage staff.

Using the Employment Status Service

Simone has confirmed that she owns more than 5% of her PSC and is the sole director and employee. The Ministry uses the online Employment Status Service to help them determine if off-payroll rules should apply.

The Employment Status Service asks for responses to a variety of questions to determine whether off-payroll working rules should apply. For Simone, the service indicates that the rules should be applied.

Deducting tax and NICs

The Ministry’s HR department obtains from Simone the information needed to pay her PSC through their accounting systems.

This includes:

Simone’s National Insurance Number

her date of birth

personal address

a P45 from previous employments if available

the bank account details in to which payments will be made

They do not need any Student Loan information from Simone as she declares that through her self-assessment tax return.

Paying the PSC

As the fee-payer, the Ministry will need to make payments to Simone Data Ltd net of tax and NICs and report those to HMRC. They update their systems to enable tax and NICs to be deducted from payments to the PSC. When doing so, the HR team indicates that the engagement will not be subject to pension enrolment or pay-rolled benefits arrangements.

More detailed guidance regarding tax codes and the information that fee-payers need to supply in FPS will be issued shortly, after we publish draft legislation.

Responsibility for secondary NICs

The Ministry will pay secondary NICs, as it does for directly employed people.

Payments and deductions made by The Ministry (all figures are illustrative)

The Ministry treats £6000 as the cost of Simone’s services and deducts £1200 tax and £470 employee NICs which it pays to HMRC via RTI with £950 employer NICs.

The Ministry pays Simone Data Ltd £4330 each month plus £1200 VAT.

In total the 6-month contract with Simone Data Ltd will mean that the Ministry pays:

£25980 in payment to the PSC (excl. VAT)

£7200 income tax, £2820 employee and £5700 employer NICs

£7200 VAT

Statutory payments

As Simone will not be an employee of the Ministry she will not be able to claim statutory payments, such as Statutory Sick Pay and Statutory Maternity Pay through their payroll. As is the case now, Simone will continue to be able to claim statutory payments through her PSC.

End of contract

At the end of the contract with Simone Data Ltd, the Ministry gives Simone a P45 as they would for a directly employed person who leaves their employment.

Capital Transport Services Ltd is a publicly owned limited company and engages an engineer through his PSC – off-payroll working rules apply.

Context

Alistair provides engineering services through his PSC, Alistair Engineering Ltd. He gets a lot of his work through a recruitment agency.

The agency has been asked by Capital Transport Services Ltd (CTSL) to supply an engineer for a 12-month contract working on the railway network in a large city.

Alistair Engineering Ltd has a draft contact from the client to provide Alistair’s services.

Should off-payroll working rules in the public sector apply?

CTSL need to understand whether they should apply the off-payroll working rules as they are engaging Alistair’s services through his PSC.

All public sector bodies that are subject to the Freedom of Information Act (FOIA) provisions are responsible for implementing the changes to the off-payroll working rules.

CTSL is a wholly-owned company that is a subsidiary of Capital Transport, the transport authority for the city. Capital Transport is a public authority listed under the local government section of Schedule 1 of the FOIA.

Section 6(2)(b)(ii) of the FOIA indicates that where a company is wholly-owned by a public authority, that company is also a public authority for the purposes of the FOIA. Capital Transport Services will need to determine if the off-payroll rules should apply.

Using the Employment Status Service

Alistair will be working out of the city’s main railway engineering site

he is not required to supply his own equipment

Alistair will work under the direction of a senior engineer

Alistair will need to agree time off with his manager

The Employment Status Service asks for responses to a variety of questions to determine whether off-payroll working rules should apply. For Alistair, the service indicates that the rules should be applied.

Deducting tax and NICs

Alistair provides the recruitment agency with the information that CTSL needs to provide to HMRC, via RTI details of the tax and NIC deducted from the payments made to Alistair Engineering Ltd, as if Alistair was an employee.

This includes:

Alistair’s National Insurance number

his date of birth

personal address

a P45 from Alistair’s previous employments in the tax year if available

the bank account details in to which payments will be made

Alistair does not need to provide any Student Loan information as he declares that through his self-assessment tax return.

Paying the PSC

As the fee-payer, CTSL’s accounts payable department updates their systems to enable tax and NICs to be deducted from payments to the PSC, Alistair Engineering Ltd. Alistair will not be enrolled in to their pension scheme, or pay-rolled benefits arrangements.

More detailed guidance regarding tax codes and the information that fee-payers need to supply in FPS will be issued shortly, after we publish draft legislation.

Responsibility for secondary NICs

CTSL will pay secondary NICs related to the engagement, as it does for directly employed people.

Each month, CTSL pays Alistair Engineering Ltd a total of £4700, which is £3700 for the services provided plus £1000 VAT.

Statutory payments

As Alistair will not be an employee of CTSL he will not be able to claim statutory payments, such as Statutory Sick Pay and Statutory Paternity Pay through their payroll. As is the case now, Alistair will continue to be able to claim statutory payments through his PSC.

The contract ends

When the contract comes to an end, CTSL gives Alistair a P45 as they would for a directly employed person who leaves their employment. The P45 indicates Alistair has had £10800 tax and £4800 NICs deducted from his pay for the duration of the contract.

Janice is a Project Manager, contracted by a building company to work on the construction of a new wing at an NHS hospital – off-payroll working rules do not apply.

Context

Janice is a project manager who provides her services through her own company, Janice PPM Ltd. The company has been contracted by Hospital Construction Ltd to project manage the building of a new wing at a hospital, managed by an NHS Trust.

The NHS Trust has agreed to pay Hospital Construction Ltd an amount of £500m in payment for the construction project. Hospital Construction Ltd is expected to pay their own staff and contractor costs for the project.

Do off-payroll rules apply?

Janice’s role will be to work closely with the NHS Trust to understand and deliver the project requirements and with the construction company and other partners to make that happen. She meets with the Trust managers as part of the recruitment process, but the recruitment decision is for Hospital Construction Ltd as they are the vacancy holders.

The NHS Trust, whilst having an interest in the work of Janice is not responsible for paying Janice’s PSC. They will not be responsible for determining whether or not off-payroll rules should be applied.

Should the existing intermediaries legislation (IR35) be applied?

Janice’s work for Hospital Construction Ltd is not in the public sector. Her services are being supplied to Hospital Construction Ltd. As now, it will be the PSC’s responsibility to consider whether off-payroll working rules should apply. The nature of the contract and the services that Janice PPM Ltd provides to the client will determine if intermediaries legislation (IR35) should apply. Janice can use the online Employment Status Service to help work out her status for this contract.

Payments

They want Janice for this work so offer Janice PPM Ltd a 12-month contract for £100,000, plus £20,000 VAT for the supply of her services, which Janice accepts. Hospital Construction Ltd will make payments on an invoice basis at agreed points during the contract.

Payments will be made to Janice PPM Ltd gross plus VAT.

Teachers 4 U Ltd supplies teachers to local schools through an umbrella company: off-payroll working rules do not apply.

Context

An employment agency, Teachers 4 U Ltd specialises in supplying teachers to local schools. One has asked the agency to provide a supply teacher for a full school term to cover an unexpected absence. The contact is worth £15000 plus VAT.

Hamed is a supply teacher who provides his services through a PSC, Hamed Tutoring Ltd. He gets much of his work through Teachers 4 U Ltd. He is paid for his work, found through the agency by an umbrella company, Teeming Ltd who deduct tax and NICs from his salary.

Do the off-payroll rules apply?

Teachers 4 U Ltd has the contract to find teachers for the local school. The umbrella company, Teeming Ltd is the organisation that the local school pays for the workers’ services. Hamed is providing his services to the client, the local school. He is however contracted through Teachers 4 U Ltd to Teeming Ltd, with whom he has a contract of employment. Teeming Ltd pay the teachers through their payroll, deducting tax and NICs.

Using the Employment Status Service

The local school uses the online Employment Status Service which determines that, as Hamed has been supplied by Teachers 4 U Ltd and has a contract of employment with Teeming Ltd, the off-payroll working rules do not apply.

Responsibility for secondary NICs

Teeming Ltd, the body that pays Hamed is responsible for paying secondary NI contributions related to his contract to work at the school.

Jasmine is a Website Designer, contracted to a large local authority to design and build a website - off-payroll working rules do not apply.

Context

Jasmine is a website designer who provides her services through her own company, Jasmine WWW Ltd. The PSC has been contracted by a local authority, Midshire CC to design and build a new website, through which local residents should be able to access and use their services.

Do off-payroll rules apply?

Jasmine’s task is to design and build the new website. To do so, she will need to work closely with the council to understand their requirements, including technical specifications and timelines. Jasmine will have a large amount of control for how she delivers her work and other than regular checkpoint meetings and progress appraisals with the council’s Head of IT Services, her work will be largely unsupervised.

visit the council’s offices for meetings, but will mainly work from her own office

provided her own equipment needed to do the job in hand

employ her own staff to help deliver the contract if she needs to

cover her own costs and expenses

Using the Employment Status Service

Midshire CC uses the online Employment Status Service to help determine whether the off-payroll rules should apply to the contract with Jasmine WWW Ltd. Given the nature of Jasmine’s work and the contract with the PSC, the service indicates that the rules do not apply in this instance.

Jasmine WWW Ltd has been contracted to provide a distinct product to the council and will bear the costs associated in delivering that. Although her work is for the public sector, Jasmine will not be performing a role which would be considered to be that of an employee.

Payments

Midshire CC will pay Jasmine WWW Ltd for the contract for £200,000, plus £40,000 VAT for the supply of the company’s services and expertise. Payments will be made directly to Jasmine WWW Ltd without any deductions for tax or national insurance.

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